Pension for most state workers falls to 19 percent funded

FRANKFORT — The public pension fund that covers 120,595 Kentucky state government workers and retirees continued its rapid decline in Fiscal Year 2015, ending with only 19 percent of the assets it’s expected to need to pay its future bills.

The total pension and retiree health insurance liability of the Kentucky Retirement Systems, which operates multiple pension funds for state and local governments, was $35.8 billion on June 30. KRS had $16.1 billion in assets, or just 45 percent of what it will need for promised benefits.

It ranks among the nation’s worst-funded retirement systems, between Illinois and Connecticut. Nationally, the median state pension fund last year had 70 percent of the money required to meet its obligations, according to a Bloomberg report released in October.

Kentucky’s grim news was presented Thursday to the audit committee of the KRS board of trustees. KRS oversees pension and insurance funds for about 350,000 people employed by or retired from state or local governments or state police.

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19 percentThe funding level for the Kentucky Employees Retirement System’s non-hazardous pension fund, which covers about 120,000 state government workers and retirees

“This wasn’t unexpected. Nobody’s happy with it, but we knew it was coming,” said Mike Cherry, a KRS trustee and former Democratic state representative from Princeton.

The most anemic pension plan is the $2.3 billion fund covering most state workers. Due to inadequate contributions by the state, the 2008 recession and weak investment returns, the funding level for Kentucky Employees Retirement System (Non-Hazardous) fell from 85 percent in 2004 to 21 percent last year.

The state workers’ pension fund is projected to fall even farther, to 15 percent by 2020, and stay there for five years before beginning a slow recovery over the next decade, according to an actuarial study issued in May. That assumes the General Assembly honors its 2013 commitment to fully fund state pensions, and that investment returns will be as strong as hoped for — two big assumptions, some state retirees fear. It’s estimated that fully funding pensions will cost $786 million from the state’s General Fund next year, an increase of $124 million over what the state paid this year.

“They’re worried. I mean, that’s the best way to describe it. They have faith the checks are going to keep coming, but they are worried about it,” said Larry Totten, a member of Kentucky Public Retirees, which monitors the pension fund. “I think many are savvy enough to understand that if we get another 2008 to happen, there might be some real problems.”

There is “maybe a 50/50 shot” the legislature will fulfill its pledge to make the annual required contribution to KRS in coming years, said Chris Tobe, a Louisville financial consultant and pension watchdog who sat on the KRS board of trustees from 2008 to 2012.

This problem obviously isn’t going to go away. It’s going to get a lot worse before it gets better, and we’re going to be living with it for a long time.

Chris Tobe, Louisville financial consultant and pension watchdog

Pension costs will grow by hundreds of millions of dollars over time, in a state budget already struggling to pay for other needs, Tobe said. And the General Fund only pays for about 40 percent of the employer contributions to the state workers’ pension fund, covering agencies directly within state government, he said. The rest is separately owed by other public agencies, like Kentucky Educational Television, regional universities and nonprofit mental health centers, most of which are cutting their workforces — and therefore, their pension contributions, he said.

“This problem obviously isn’t going to go away,” Tobe said. “It’s going to get a lot worse before it gets better, and we’re going to be living with it for a long time.”

Auditors on Thursday told KRS trustees the primary $6.4 billion pension for local governments — the County Employees Retirement System (Non-Hazardous) — stood at 60 percent funded on June 30, down from 62 percent last year. The $248 million pension for Kentucky State Police — the State Police Retirement System — stood at 33 percent funded, down from 35 percent last year, raising its own viability concerns.

“The number one problem is funding,” Keith Peercy, the KRS trustee who represents state police. “When only a portion of the annual required contribution is funded for several years in a row, any fund will decline quickly. Then you add in a historic recession and the fact that SPRS is the only fund with more retirees than active workers and you have a perfect storm to leave us in a really bad condition.”

KRS is separate from the state’s other struggling pension agency, the $18.5 billion Kentucky Teachers’ Retirement System, which covers more than 141,000 active and retired educators. KTRS either has a little more or a little less than half the money it needs for future payments, depending on which accounting method is used. A state task force studying KTRS is supposed to propose possible solutions, with price tags, early next month.

Governor-elect Matt Bevin said during his campaign that he will reshape the state pension systems in an effort to make them sustainable. Defined-benefits retirement plans that guarantee monthly checks until a worker dies no longer are viable, Bevin said. He would put future public employees in a less generous defined-contribution plan, such as a 401(k), that could run out of money if employers and employees don't contribute adequately or invest their holdings well enough to cover the employees' retirement years. That would limit the state's liability, he said.

However, Bevin’s changes would have to get through the legislature, where many lawmakers oppose putting public workers in 401(k) accounts. Among the problems these critics cite is lost revenue as new employees are enrolled in a 401(k), diverting their paycheck withholding and employer contributions from the existing pension funds that still must support tens of thousands of retirees.